At mozo.com.au, we help Australians to compare financial products. Usually, people want to compare the interest rate of one home loan with the rate on another one or the fees of one bank account versus another. But with some financial choices, it’s not only a choice between product X or product Y, it’s trying to work out which product type will be better for your financial circumstance or borrowing needs.
This is definitely the case if you are considering borrowing money for an overseas holiday adventure in 2019.
With most savings accounts these days earning paltry interest, saving the full amount for a holiday in advance has become less attractive, and for many Australians, the option to enjoy now, and then pay off the purchase in instalments has gained popularity.
There are three main ways that Australians can choose to buy now, pay later - using a credit card, taking out a personal loan through lenders like SocietyOne or opting for one of the new post pay platforms like Afterpay and ZipMoney.
In our 2018 report on the spending habits of people using Afterpay, we found one of the biggest traps of the culture of buy now, pay later, is that people are spending beyond their means and finding themselves caught in a continuous cycle of debt.
But don’t abandon your dream of a 2019 holiday just yet. All post pay options, if used smartly, can be a great way to spread out the cost for a big ticket item like a holiday. The key is limiting the amount of interest and fees that you pay, and being disciplined in sticking to a repayment schedule.
With a personal loan you’ll have set repayments and a loan discharge date so you will be paying down your full holiday debt over time. While you will be paying interest on a personal loan, generally speaking it will be a lower rate than a credit card. Right now, the average credit card rate is 17.1% whereas if you’ve got great credit you can get a low rate personal loan from 7.50% (9.51% comparison rate)* with SocietyOne.
Holiday timing is also a key consideration in choosing the right post-pay option. If you’re going to be booking your airfares early and your accommodation closer to your leave date, you can spread out the cost of these repayments effectively with a credit card, whereas a personal loan is handy when you need to make a single lump sum advance payment like for a cruise or tour.
If you’re thinking of using a post-pay service like Afterpay, just keep in mind that, unlike a personal loan or credit card, where you get a single statement and repayment due date, if you use Afterpay to pay for multiple trip expenses, you could end up with multiple due dates to make payments, which can make it harder to track and budget effectively. But on the flip side, master the instalment plan (perhaps with the help of a direct debit) and you could be travelling interest free.
Weighing up the pros and cons...
- Pro: Set repayment amount each month and repayment term to help you budget
- Pro: Lower interest rates and fees than some credit cards
- Pro: Flexibility to pay back loan faster without penalty
- Pro: Good way to build up credit rating
- Con: Loan is funded in a lump sum so you pay interest on full loan amount even if you haven’t spent the money.
- Pro: You can pay for expenses as they come up and only pay interest if you can’t pay back the full amount within the interest free period.
- Pro: Some travel credit cards have added benefits like complimentary travel insurance if you purchase your airfare or other prepaid travel costs on your card.
- Con: The average credit card interest rate is 17.1% and some cards have interest rates over 20%.
- Con: The minimum repayment amount is variable and the repayment term when repaying only the minimum amount can be many, many years.
Alternative post pay services
- Pro: Interest free as long as you meet the instalment plan deadlines.
- Con: If you use it for multiple trip purchases you have several repayment due dates and amounts, which can make budgeting difficult.
- Con: You can link your credit card to the account, which means that if you don’t pay this off in full each month you’ll be paying high interest.